The greatest behind-the-scenes struggle throughout much of corporate America is the division between shareholder value and stakeholder value. For years publicly-held companies have focused on short-term shareholder value, and one need only listen in on any quarterly earnings call to understand that the biggest question asked is, “How much more will we earn next quarter?” And if quarterly earnings are lower than projected, the next biggest question is, “Why?”
This focus may play well on Wall Street, where minor fluctuations in earnings are often the cause of panic, but analysts have long criticized this focus as detrimental both to the corporation’s long-term profitability as well as to stakeholders other than shareholders.
“The desire to shift the corporate focus away from pure shareholder value to a broader focus on providing value to all stakeholders, including workers, suppliers, customers, and community, is not, as some would have it, a radical idea, or even a new one,” said Mike DiLeo, President of Management and Strategy Institute. The idea has gained attention this year however, after the Business Roundtable, a group representing the most powerful CEOs in the United States, issued a new set of guiding principles on the role of the corporation.
A new role for corporate governance
The Business Roundtable’s new principles on the role of a corporation were released recently, suggesting that corporations move away from the inherently short-term “shareholder first” vision which so often prevails on those earnings calls. The Roundtable has in the past advocated more of the vision of economist Milton Friedman, a view which holds that the only purpose of a corporation is to maximize shareholder value.
Take for example, the overwhelming trend among corporations to embrace green and environmentally friendly processes. Though some corporate leaders may do so out of purely humanitarian motives, most simply acknowledge that this is what the customer demands. Younger and millennial customers will go out of their way to patronize more environmentally-friendly companies. Manufacturers have adapted their shop floor processes, restaurants and others in the hospitality industry are implementing customer-facing green initiatives, and some companies are even going as far as putting an EVP-level or C-level executive in place to create and execute green policies. Short-term, it is often costly. Shareholders may balk, and there is likely to be conflict. But long-term, it serves the customer – and in serving the customer, it serves the shareholders by deriving revenue from offering a business that is maintained in a way that is appealing to the company’s customer base.
Stakeholder value is shareholder value
“Friedman is correct up to a point,” said DiLeo. “Maximizing shareholder value is and should be a primary goal for the corporation, but getting there requires the corporation to provide value to others as well.”
Placing the corporate role beyond shareholder value to embrace all stakeholders, including the broader community and workers as put forth now by the Business Roundtable, is by no means borne out of a dream of socialist utopia. It is an acknowledgement that shareholder value can never be achieved in isolation, at least if long-term shareholder value is the goal.
“The role of Six Sigma in corporate strategy is firmly based in this acknowledgement,” said DiLeo. “As a precise process of sustainable improvement, Six Sigma’s stated goal is to use these processes, not as a means to provide shareholders with dividends, but rather, to deliver a superior product to the customer and to meet the needs and desires of that customer. This longer-term and more holistic view of the corporation’s goal as delivering value to the customer and other stakeholders in reality serves the shareholder far better than the short-term shareholder value focus so often seen in boardrooms, which is often destructive and detrimental to long-term value.”
What even some CEOs may not yet realize is that the Friedman view of the primacy of shareholder value, and the new Business Roundtable view of stakeholder value, is not mutually exclusive.
Six Sigma Based Evolution of Business
Six Sigma bases its process on a continuous analysis of data, and in creating and continuously adapting processes based on that data. Everything changes. “The needs of the customer, and how the corporation meets those needs, must change for a business to survive,” said DiLeo. “The nature of business, the role of the corporation, and the needs of the shareholders – that all changes over time as well, and the time is at hand to move from a pure zero-sum Friedman approach to value to the shareholder at the expense of other stakeholders, to a process that seeks to provide end-to-end value by, as the group’s new mission statement says, delivering value to customers, investing in employees, dealing fairly with suppliers, supporting their communities, and generating long-term value for shareholders.”
The stakeholder focus remains firmly ensconced in the free market and capitalism, with the recognition that change is inevitable and necessary for survival. Six Sigma acknowledges the need for constant and often destructive change based on new data and external factors.
Shareholder value remains important, and indeed without it, the corporation would not exist. But maximizing shareholder value through, for example, short-term maneuvers such as stock buybacks often benefit the shareholder at the expense of other stakeholders, and in so doing, do nothing for shareholder value long-term. The Six Sigma approach of continuous innovation and change, data-driven analysis and customer focus will serve the shareholder best.